If you actively trade on the market, you must have faced the so-called “false breakout problem” when you have already found a good entry point, you see an excellent technical model, but after entering into a position, the price reverses and completely ruins your plans. Such things can lead to serious losses and unambiguously negatively affect the emotional state of the trader, and this, in turn, leads to a negative balance on accounts. We figured out how to protect traders from such scenarios, and we will discuss the methods along with trader Vitaly Tontin, who leads an educational channel about trading.
There are many models of indicating the false breakouts. One of the most common and reliable methods is the analysis of the volume of trading. For example, if there is a strong decline in the volume indicator when approaching a certain level of support or resistance, then, most likely, large investors are not interested in this movement, which means that there is a possibility that the level will not be breached and the price will unfold.
In addition to volume, there is another interesting and simple feature that will help save your nerves and capital. We call it “buying units.”
The “Buying Units” Method
The essence of this approach to trading is not to enter into a position ahead of the market. We will buy only upon the fact of breaching the key price level and give the market several “units” in order not to enter into a false breakout.
As you know, important price levels on a chart, as a rule, are represented by round figures, such as $10, $20, or $100. The levels are formed subconsciously among the participants, and there are often interesting movements around such figures.
According to the method of “buying units,” the trade should be entered into after the level is achieved, but at a price slightly higher than the cost of the level that was breached. The difference between the price of entry and the price of the level are called “units” that we pay in exchange for a safe transaction.
It is worth noting that the more “units” you give to the market, the less of a chance you will have of suffering from the problem of a false breakout. Respectively, if you give too little clearance, then the risk of suffering additional losses increases.
In this method, of course, the main task of the trader is to find the optimal number of units they are ready to give to the market for not getting into a false breakout, but at the same time not to miss the trend if it is not false.
Let’s analyze the example below to find the optimal point.
Take the hourly chart ETH/USD, which forms qualitative horizontal levels of support and resistance.
In our example, we are trying to enter the penetration level of $850. Draw a line and see how strong the level is (the more the price changes direction starting from this level, the better). Next, we need to assess how often and how much the false breakouts were in the not so distant past. Do not pay attention to the huge tails formed at the end of strong impulse movements (as at the beginning of formed levels), you cannot protect yourself from them, but you can simply refrain from entering into such trades.
As you can see, the maximum false breakout of this level was about $8 (from $850 to $858), so when entering the position, we can safely place our order for purchase at a price higher than the level of 9 to 10 units ($9 to $10) and get a few percent higher probability of making a profit on the transaction.
In this example, the situation is similar. In order to be relatively safe to enter into a trade, we would need to place an order for ~$20 above the $1,100 level, based on the two previous unsuccessful approaches to the level.
Nothing is for certain in trading. Some professional speculators consider themselves even creative individuals. But, believe me, this method can save you a lot of money, as your task is to find the optimal “number of units” for which you are willing to pay in exchange for:
a) Reduced probability of falling into false breakouts;
b) Increased number of positive transactions.
Of course, the method has its limitations, which you need to know and understand:
a) Decrease in the potential profit-to-risk ratio;
b) Complexity of finding the optimal number of “units.”
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